Steve Rattner: Unprecedented market fears of U.S. default

Well, hopefully we're in good shape in the debt ceiling. I can't imagine anybody ever even thinking of using the debt ceiling as a negotiating wedge. And I said, I remember to Senator Schumer and to Nancy Pelosi, would anybody ever use that to negotiate with? They said, absolutely not. That's a sacred element of our country. They can't use the debt ceiling to negotiate. You once said that using the debt ceiling as a negotiating wedge just could not happen. You said that when you were in the Oval Office.

That's why I was president. So why is it different now that you're out of office? Because now I'm not president. The U.S. defaulting would be massively controversial for everyone in this room for all of you. You don't know. It's psychological.

It's really psychological more than anything else. And it could be very bad. It could be maybe nothing. Maybe you have a bad week or a bad day. Look, you have to cut your costs. We're spending $7 trillion on, much of it on nonsense, $7 trillion on nonsense. We've got another question to the voter tonight.

Get all of that money that was wasted. And frankly, the Senate should have never approved it. Get all that money that was wasted. And if they don't get rid of that, you'll have to default. Donald Trump at the town hall, and that first bite you heard was from 2019, where he said the raising the debt limit was a sacred element of the country. Now it says, maybe we default. Former Treasury official and Morning Joe economic analyst Steve Ratner is over at the big Southwest wall with his world famous chart.

Steve, good morning. It's good to see you. Let's, before you dive into the charts, just your reaction to what Donald Trump said last night that maybe it wouldn't be so bad if we defaulted for a little while. Well, Willie, let me just show you actually what happened when we almost defaulted. And I'm going to go back to 2011, which was the debt ceiling, the worst debt ceiling crisis we've had before the current one. And I'll explain all these numbers in a second. But in that crisis, even though it was resolved, what happened? The U.

S. lost its AAA credit rating from Standard and Poor's has yet to get it back. We are one poor, we were 1.2 million jobs fewer over time than we would have had if we hadn't had the problem. The stock market truck's 17% in the course of all this. It's a little hard to say that this is sort of some big circus or joke or just an illusion. So you've got unprecedented market fears of a default happening right now.

The markets don't seem to be confident that the White House and Kevin McCarthy and the Congress can work this out. Right. So as I said, this is a measure of insurance on the U.S. debt. You can actually buy insurance against the default just like your car, your house. I won't explain what all the numbers mean, but obviously, higher is bad.

And so 2011, as I said, was our worst previous case. It got to this index, got to about 85, had a smaller one in 2013. But look where we are here now. We are almost at 200. We are just under 180 at the moment. You can look at this as a kind of fear index if you want of what people believe in the markets could possibly happen in this crisis. Everyone I talked to, everyone who was involved in these past crises, say this is the worst one, the scariest one yet.

So Steve, as we move over to your second chart, let's talk about what Republicans are hoping to extract from this negotiation over the debt ceiling, major cuts to discretionary spending. Sure. So let's just set a baseline for all of our viewers to explain discretionary spending very quickly. So here's our budget, $6.3 trillion. Most of it is made up of things that Congress does not appropriate on a yearly basis. Social security, Medicare, Medicaid, things like that are all locked in.

Then you have defense, which most people consider to be locked in. And so what we're fighting about, what the Republicans are aiming at, is this little 11% slice of the budget. And where that becomes important is because when you start cutting the amount they want to cut, you're only cutting from this, which means that in order to achieve their number, they want to cut 47% of that. And so that includes all these different kinds of agencies, NASA, commerce, international education, energy, labor, justice state, all of them would have their budgets cut by 47% and that's after inflation, so the actual cuts would be bigger. And just to put that in perspective with the president's proposal, the president has a relatively modest increase of 4% in his spending and he has some offsetting deficit reduction measures, which we'll talk about in a second. So 47% proposed cuts to discretionary spending from Republicans and as you move to your third chart, it represents a philosophical difference where Joe Biden wants to find the money by raising taxes and Republicans want to do that by cutting spending. Exactly, Willie.

So first you have the Republican cuts that we talked about that essentially are 4.8 trillion of which virtually all 4.5 trillion is by cutting taxes. Ironically, the revenue raisers, most of the revenue raisers that they want is by taking away the IRS funding, which actually costs the government money because we make money on the IRS because of the audits and recovering money from taxpayers. So President Biden, as I said, wants to increase spending modestly by $2.6 billion over $10 years, a trillion over $10 years, excuse me, that should be a T. But he wants to raise taxes mostly on business and wealthy Americans by $5.

3 trillion over the same period. So his deficit reduction is smaller than the Republicans. But if you look at this very last chart here, what you'll see is that the Republican savings are in the early years, Biden catches up and by the end, Biden actually reduces the deficit by slightly more than Trump when you get out to these out years. But look, we shouldn't care ourselves. We do have a deficit problem. There is the problem. Letters are a growing deficit without doing something.

And both of them are trying to do something. But as you alluded to, the something is very different.

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